December 15, 2019

Please Vote for “Best Niche Blawg” – Today!!!

Bankruptcy Law Network’s blog, where I write with 25 other premier consumer bankruptcy lawyers,  was recently voted one of the 100 best blawgs by the American Bar Association.  They’ve opened the voting among their 100 best up to the public.

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Chase Home Finance Accused of Adding Improper Charges to Bankruptcy Claims

As a member of the Bankruptcy Law Network, I am part of a small group of knowledgeable and prolific bankruptcy lawyers from all over the country.  If you have not yet checked out the Bankruptcy Law Network blog, and its sister blogs

I encourage you to do so.

In addition to writing for the BLN family of blogs, most of my colleagues in this endeavor publish their own websites and blogs that address more local concerns.  Just as this blog focuses on bankruptcy issues relevant to the Northern District of Georgia, frequently the BLN member blogs will have a local focus as well.  However, there are some bankruptcy and consumer protection issues that have a national focus.  I subscribe (using RSS and my iGoogle page) to a variety of bankruptcy and consumer bankruptcy blogs from around the country for the purpose of picking up trends and learning about case strategies that may very well work for me in my local practice.  If you are a bankruptcy lawyer or individual interested in keeping track of what is going on in the bankruptcy world, I invite you to subscribe not just to this blog, but to several of the bankruptcy related blogs listed on my blogroll.

BLN member (and founder) Jay Fleischman recently posted a blog article that has relevance in any bankruptcy jurisdisction.  His post entitled “Chase Home Finance, Caught Manufacturing Defaults in Bankruptcy Court, Nears Deal with U.S. Trustee” discusses a problem that I believe has existed for years with many mortgage lenders who file claims in bankruptcy court. [Read more…]

Pre-Bankruptcy Balance Transfer – the Debtor Wins…This Time

My Bankruptcy Law Network colleague, Wendell Sherk, recently posted a very helpful case study about a case called In re Brumbaugh in Ohio involving credit card use prior to bankruptcy.  Although Wendell’s case study looks to 6th Circuit law (whereas cases filed in Georgia would look to 11th Circuit precedent), I think that the reasoning used by the judge in the Brumbaugh case can give you some insight as to how bankruptcy judges deal with real life situations.

In the Brumbaugh case, a debtor transferred an $18,000 balance from a high interest credit card to a new Chase credit card.  The debtor also used the Chase card for several small retail purchases including a few purchases made after she spoke to a bankruptcy lawyer.

After the debtor filed for bankruptcy, Chase filed a lawsuit in bankruptcy court (called a Complaint to Determine Dischargeability of a Debt) to argue that the entire $18,000 balance should be deemed "non-dischargeable" by the bankruptcy judge.  In other words, Chase wanted its claim to survive the bankruptcy and not be discharged.

Despite a fact pattern that looked pretty bleak for Mrs. Brumbaugh, the bankruptcy judge ruled against Chase.  While recognizing that this was a close call, the judge ruled in favor of the debtor because of the following:

  1. most of the $18,000 balance was in the nature of a balance transfer, not new charges – under the bankruptcy law, balance transfers are not treated like new purchases
  2. the debtor made the transfer in response to a Chase offer that gave her 0% interest
  3. the transfer was made by the debtor who was going through a divorce and the debtor saw the lowered interest rate as necessary to get her financial house in order
  4. the debtor and her spouse were trying to sell their house and planned to use the proceeds to pay down this debt.  The house did not sell, but the judge believed that the debtor had a reasonable plan
  5. the debtor made payments to chase after the transfer – debtors who plan to defraud a creditor rarely make payments.

Obviously, not every judge would rule the same way as the judge did in the Brumbaugh case.  And Mrs. Brumbaugh had to pay a lawyer to defend her in this litigation.  My feeling is that if Mrs. Brumbaugh had been even slightly less credible and sympathetic, she would have lost.

Wendell closes his post by repeating a warning that I have been giving for years – if bankruptcy is an option, even a remote option, be very careful about making any significant financial moves until you have spoken to a lawyer.  For information about bankruptcy in St. Louis, take a look at Wendell’s web site.

Are There Tax Consequences if You Surrender Your Home in Bankruptcy?

I recently received an email from a very concerned Chapter 7 client who I represented in 2006.  My client had suffered a fairly drastic reduction in his income and as part of his Chapter 7, he surrendered his home, which has a fair market value of approximately $650,000.  There were no objections in this case, and my client received his discharge as a matter of course.

Around the first of February, 2007, my client received a 1099 from the mortgage company showing that $599,000 of debt was forgiven.  I checked with my colleague, CPA Scott Rittenberg, who advised me that in a non-bankruptcy context, a homeowner who sells or loses a home to foreclosure could be liable for taxes on the difference between his basis in the home (in this case around $500,000) and the forgiveness ($599,000).  Would my client be looking at an income event in the amount of $99,000?

Scott did note that if my client had been in his home for two years or longer there was a $250,000 exclusion that applied, but absent a two year stay, there could be a tax problem.  Scott advised me to look further to research the rules about how a bankruptcy might change things.

I did a quick search on the BankruptcyLawNetwork blog and I found this post that answered by question about the tax treatment of a forgiveness of debt in bankruptcy by my colleague, attorney Cathy Moran of Mt. View, California.  Cathy publishes a very comprehensive and informative California bankruptcy law web site that speaks to many consumer bankruptcy issues.

Cathy advises that if you get a 1099, you should file a Form 982 to advise the IRS that the debt forgiveness occurred in bankruptcy and has no tax consequences.

2008 Update: you can read another informative post about the tax treatment of debt forgiveness in a bankruptcy on Taxgirl’s blog in a post entitled “Foreclosures, Debt Forgiveness and Mortgage Losses Explained.”  Click on the link to read this post.

Needless to say, my client is much relieved by the answer to his question.  Tax consequences arising from a deed in lieu of foreclosure in a non-bankruptcy setting could have significant and unintended consequences.  If you have option of executing a deed in lieu vs. a bankruptcy, keep the tax issues in mind.

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